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Gold prices will end the year higher than previously expected as central banks in emerging markets continue to accumulate real assets amid geopolitical risks, analysts at financial services firm Goldman Sachs said in a report. Friday.
They raised their year-end goal for the precious metal at $2,700 per ounce compared to the previous level of $2,300 per ounce. Gold over the past two months rallied more than 20% on Friday achieved another record of more than $2,400 an ounce amid concerns that Iran could attack Israel, potentially escalating the war in the Middle East.
“Most of gold’s rally since mid-2022 has been driven by new incremental (physical) factors, not least a significant acceleration in emerging market central bank accumulation and Asian retail buying,” said Nicholas Snowdon , analyst at Goldman Sachs. he said in an April 12 report.
Predicting gold prices requires a new approach, he said, as the precious metal rises despite the possibility that the Federal Reserve will cut interest rates fewer times this year than previously expected. Higher rates typically result in greater demand for the US dollar relative to gold.
“Looking at gold as a barometer of fear and wealth is useful,” Snowdon said. “The fear component can be cyclical – 2000, 2008, 2020 – or more structural, when confidence in the dollar-backed international monetary system is called into question.”
A key difference between cyclical and structural fear is gold’s correlation with real rates, he said. A real rate is an interest rate that has been adjusted to eliminate the effects of inflation.
“If those who buy gold also buy Treasuries, their confidence in the system remains,” Snowdown said. “However, if gold and rates rise together, as they have in recent periods, this signals a clear shift in risk preference towards real assets.”
What will end gold’s momentum?
According to Goldman, four major developments could curb the hunger for gold. The first two are lower purchases by central banks in emerging markets, either due to an easing of geopolitical tensions or because banks have reached their hard asset targets.
“A peaceful resolution to ongoing issues in the Middle East and Ukraine, and a resolution of the risk of associated sanctions,” the report states. “This would likely act as a constraint on central bank purchases of emerging markets.”
China’s efforts to shore up its real estate sector, which is strained by massive debt, could lead Chinese consumers to reduce their gold purchases. Finally, an aggressive tilt by the Fed to raise rates in its continued effort to curb inflation would also reduce demand for gold.
“The reality, however, is that the near-term potential for a combination of these developments is low, which reinforces our expectation of continued bullish momentum in the gold price,” according to Goldman Sachs.